Shadow Banking Case Study
Shadow banking system is a term for the collection of non-bank financial intermediaries that provide services similar to traditional commercial banks. The example of shadow banking system including underground deposits, Peer to peer lending, online platform, and wealth management products. Recent years in China, the shadow banking has become a big problem.
One of the example of shadow banking is private lending. (Nadrich, 2012) Private lending is an investment channel for private capital. It is a form of private finance. Private lending is more flexible, convenient, high profit than traditional banks but it is also contains very high risk.
There are two institution factors lead to the rise of shadow banking system in China.
First, shadow banking system is result of inadequate development between state-owned enterprises and private enterprises. State-owned enterprises are always the monopoly in every business field. In the opposite, private enterprises have made important contribution in GDP and employment rate in China. However, private enterprise used to receive orders with no loans from formal banking system. Therefore, private enterprises pay a higher interest rate to loan from shadow banking system.
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Within the shadow banking system, retail depositors loan from traditional banking system and lend to shadow banking system. Shadow banks loan to borrowers. In a positive operation, borrowers return the principal and interest to shadow banks. The retail depositors are then taken advantages with receiving principal and interest from. Nonetheless, if borrowers are not able to return the principal and interest, the whole shadow banking system will shut down. In case of the high potential risk and adverse effects of shadow banking system, formal banking would handle the non-performing loan. This encourages the vicious cycle of shadow banking
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